TMI Blog1984 (7) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon point relating to the secret commission is dealt with in the later part of this order. Assessment year 1975-76 : 2. The assessee sold a flat during the year along with a garage at Hill Park. Long-term capital gains of Rs. 1,11,500 were returned. The ITO referred the matter to the Valuation Officer for finding out the fair market value of the property. The Valuation Officer fixed this at Rs. 4,34,000. Applying the provisions of section 52(2) of the Income-tax Act, 1961 ('the Act'), the ITO, therefore, worked out the capital gains at Rs. 3,56,500. On appeal, the Commissioner (Appeals) deleted the addition made on this score of Rs. 3,22,500. 3. The learned counsel for the department has pointed out that this was a clear case where the market value of the property was substantially higher than the recorded value. Even if the price fixed by the Valuation officer is regarded as high, it bears no comparison to the very low value shown by the assessee. 4. Having heard the learned counsel for the assessee, we find that this matter is clearly covered by the decision of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597. The Supreme Court has clearly held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal, the Commissioner (Appeals) held that expenditure on dry fruit, biscuit tins, etc., especially when their cost was not more than Rs. 50 generally could not be regarded as an expenditure on advertisement. The addition was deleted by him. 9. The learned counsel for the department has pointed out that the assessee itself has debited this expenditure to the advertisement account. The details given clearly indicate that they were to be disallowed under section 37(3). According to the learned counsel, any expenditure on advertisement could be explained away as for cementing good relations. 10. After hearing the learned counsel for the assessee, we see no reason to interfere with the order of the Commissioner (Appeals). The object of the advertisement is to attract customers. This may be done by extending to new persons facilities, advantages, etc., which would attract them to the assessee. The facilities also should indicate some excellence of the assessee's product over and above those of the competitors. Dry fruits, biscuit tins, etc., stated to have been distributed by the assessee in the present case may not serve this purpose of attracting new customers. Some of these must h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st would be to see the extent of industrial activity. The extent of processing of goods, therefore, would be the correct test. Even if, therefore, for any particular year the extent of income from manufacturing or processing activities is less than that from non-manufacturing activities and if the assessee has done for the major part of its activity, processing or manufacturing, it should be regarded as a manufacturer and the activity of an industrial entity. Apart from satisfying these conditions of the extent of manufacture, the figures indicate that the proportion of processing income is also substantially higher than other income. The Commissioner (Appeals)'s finding, therefore, has to be upheld. Assessment year 1976-77 : 13. The ITO disallowed certain amounts from the remuneration of Director-employees applying the provisions of section 40A(5) of the Act. He rejected the assessee's claim that section 40(c) of the Act applied to the case. The Commissioner (Appeals) accepted the assessee's claim. 14. The matter is covered by the decision of the Special Bench of the Tribunal in the case of Geoffrey Manners Co. Ltd. v. ITO [1983] 3 SOT 40 (Bom.). The Commissioner (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's business would have suffered and even may have closed down. From the very nature of things, the assessee could not give the names of the persons to whom these commissions were paid. Disclosure of the names would have created problems for these persons with their employers and the assessee's sales to these mill-companies would have been affected. The assessee, therefore, claimed before the ITO that even though full particulars such as names and addresses of the persons to whom the amounts were paid were not furnished, it being well known that to push the sales or even to preserve the minimum sales these payments had to be made, the expenditure should be allowed. The ITO did not accept the assessee's claim and disallowed the entire claim for expenditure on this account. The table below indicates the extent of expenses incurred by the assessee by way of secret commission or sales promotion expenses so called. -------------------------------------------------------------------------------------------------------------------------------------------------- Assessment Financial Gross turnover Profit-tax Sales Per cent year year promotion of column expenses 5 to 3 ---------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at case it was his responsibility to show that the expenditure has been incurred and properly incurred also. The assessee has claimed that certain amounts were paid to certain employees of the mill-companies with whom it had business deals. The names and addresses of the employees have not been given. Whatever be the purpose for which the assessee withheld the names, for the purpose of income-tax unless the payment is approved allowance cannot be granted. It is only after finding out who received the payment, according to the learned counsel, it is possible to find out whether the expenditure has been incurred wholly and exclusively for the purposes of the business. Since the assessee has refused to divulge the names of the persons to whom allegedly the payments were made, according to the learned counsel, it was not possible to hold that this expenditure was incurred for the purpose of business and allow the payment. Taking us through the several orders of the Tribunal, the learned counsel pointed out that in the earlier years the assessee had absolutely no details regarding the payments and the claim was disallowed. Even though for some of the subsequent years evidences in the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repugnance to public policy would have made the expenditure not allowable. Referring to the decision of the Bombay High Court in the case of Ciba Dyes Ltd. v. CIT [1954] 25 ITR 102 it is pointed out that even in Goodlas Nerolac Paints Ltd.'s case this decision was clearly distinguished. 22. The learned counsel for the assessee pointed out that the assessee, a private limited company, took over the individual business carried on by an individual earlier somewhere in 1947. There were two important textile centres at that time, one in Bombay and the other in Ahmedabad and the practice of giving secret commission to dyeing masters and purchase officers was even judicially noticed by the High Court as in connection with the business. In order to push up the sales of the assessee's commodities it has to incur this expenditure. The learned counsel has relied on the decision of the Bombay High Court in the case of Tejaji Farasram Kharawalla v. CIT [1948] 16 ITR 260. The expression 'incurred' does not mean 'actually incurred'. In fact this has been amended to the different expression 'to the extent expenditure is incurred'. The real requirement of law, according to the assessee's counsel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not disclose the names of the persons to whom ultimately the payments are made for strategic business reasons, that the assessee has been following a regular system of maintaining accounts and following a procedure for making the payments would be evident from the vouchers, entries in the books, etc. Explaining the procedure, the learned counsel pointed out that cash is withdrawn by the directors of the company for the specific purpose of making the payment. Cash vouchers for this purpose are available. Out of the amounts drawn the details of the disbursement made to the various mill-companies are available and noted at the back of the receipts. Any excess amount available after the specific payments have been made are carried over and held back with the director who again withdrew money for the purpose of further payments when necessary. There is a complete tally of the amounts withdrawn from the banks, balance left with the director, the further withdrawals from the bank and the payments made to the mill-employees. Details are also available of the particular amounts of the transactions with the particular mill, in respect of which commission is paid to the employee. The rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no question of public policy involved in this. 26. Two other parties, Indochem Ltd. and Sigma Paints Ltd., intervened on this issue of secret commission. Their learned representatives were also heard. 27. The learned counsel for Indochem Ltd., referring to the history of his client's case, pointed but that up to 1959-60 no claim was made. For the assessment years 1960-61 to 1965-66, the claim made was disallowed by the ITO and the disallowance having been upheld by the Tribunal the matter was on reference. For the assessment years 1966-67 to 1969-70, the Tribunal reconsidering its decision for the earlier years allowed the payment of commission in full. In IT Appeal Nos. 2970 and 3624 of 1971-72 and 1401 to 1403 of 1972-73 the Tribunal accepted the fact of payment of the secret commission. According to the learned counsel, evidence on record fully supported the contention of the assessee that expenditure was incurred by way of secret commission and such expenditure had to be incurred in the interest of business. There was sufficient supporting evidence though not direct evidence for the incurring of the expenditure. The Tribunal also held that the amount paid by way of secret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel, apart from the practice of making payment to the employees of the mill companies, the existence of which could be properly verified from the market, the assessee has also maintained complete supporting details to the extent they are capable of being maintained. The only missing item was the names of the particular parties to whom the payments were made. From the very nature of things these particulars cannot be supplied without detriment to the business of the assessee. 29. The position, according to the learned counsel, is the same for both Indochem Ltd. and Sigma Paints Ltd. The extent of secret commission paid by the assessee is also a nominal amount. 30. The simple issue in all these appeals relates to the allowability of certain amounts stated to have been spent by the assessee for the purposes of sales promotion. The assessee is a dealer in chemicals and dyes. These are mostly sold to textile mills. In the process of pushing these sales amongst these textile mills, it is the assessee's case that they have to give by way of commission certain amounts to the officials concerned with the purchase, dyeing, etc., departments. The assertion is that if these people a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od. We have before us three assessees at least, who between them cover several crores of rupees by way of turnover. The list of secret commission expenses incurred by these assessees as a percentage of their turnover shows that the percentage is negligibly small. In the case of the present assessee, French Dyes Chemicals (I) (P.) Ltd., the lowest percentage is .1 per cent for the assessment year 1965-66 and the highest .8 per cent for the assessment year 1961-62. For the last two years 1978-79 and 1979-80, the percentage comes to .2 per cent. In the case of Indochem Ltd. the said percentage is .130 per cent for the assessment year 1973-74 and 2.156 per cent for the assessment year 1958-59. These figures indicate that the claim made by the assessees for payment of commission refers to a negligible percentage of the turnover of the company. Two facts emerge from this : viz., that not merely the assessee but other persons with equally large turnover make such payments ; and secondly, this expenditure constitutes a small portion of the turnover, i.e., much less than many other items of expenditure they have claimed. The fact that some companies with substantially good turnover in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown that amounts have been systematically withdrawn from the bank against established details of expenses to be incurred. Thus, the sales to the mills, the articles sold, the name of the particular mill, the date of sale, etc., are available along with the percentage of commission calculated in respect of the transaction. All the commission amounts if added together, tally with the amounts withdrawn from the bank. The withdrawal itself is done by a responsible director and this systematic procedure has been going on for nearly three decades and more. Anything done systematically--even manipulations could be done systematically--should have some acceptance as genuine. It would be too much to presume, especially in the wake of the noted practice in the market, that the assessee has systematically managed to write out these details regarding the vouchers, bank account, withdrawals, etc., without any realistic background especially when several and different persons are involved. Though not, positively, therefore, negatively these details maintained by the assessee would support its case. The Tribunal in their order for the earlier years has actually accepted the assessee's claim in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the company in a loose sense, it may perhaps be pointed out that withdrawal of money by him amounts almost to withdrawal of money by the assessee himself. In our view, this position cannot, however, be countenanced because from year to year and involving several employees like cashiers, salesman, etc., the amounts have been systematically withdrawn by the director. If the Director, for argument sake, were regarded not to have even spent the money in full, the decision in Tejaji Farasram Kharawalla's case would support the case of the assessee. The decision in Tejaji Farasram Kharawalla's case was explained by their Lordships in Ciba Dyes Ltd.'s case. 35. In the case of Amritlal Co. (P.) Ltd., the Bombay High Court had the occasion to consider the allowability of commissions paid to certain employees and certain allowances to two directors. The commission was disallowed and the disallowance was upheld by the High Court on the ground that they were disproportionately high as compared to the salaries and no trade practice had been pointed out by the assessee in support of the payment. Their Lordships of the Bombay High Court considered the decisions in the case of Ciba Dyes L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e question of public policy. Apart from the reference to the provisions of section 133(4) in Goodlas Nerolac Paints Ltd.'s case, reliance was placed on the decision of the Andhra Pradesh High Court in the case of Kodandarama Co. Even though reference is made to section 133(4) which requires the assessee to give out the names of persons to whom payments are made, even the Bombay High Court decision has not categorically laid down that where this requirement is not satisfied even in a case which would have been detrimental to the business, the expenditure claimed should be disallowed. The Andhra Pradesh High Court's case dealt with the case of an assessee who were dealers-cum-mills of paddy who made contributions at specific rates to the Andhra Pradesh Welfare Fund and in return were granted export permits by the Collector for exporting boiled rice to Kerala. The High Court held that the contributions were compulsory payments exacted from the assessee as a price for granting export permits. According to their Lordships, it was not open to the District Collector or any other authority for that matter to impose a condition linking the grant of permits, to the making of a particular c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission payments have certainly gone out of the coffers of the company and the company has incurred the expenditure as a matter of fact. There is evidence to support this. The matter is spread over nearly three decades and details are entered on a regular basis. Amounts are withdrawn regularly from the company. It is not the same but different persons-employees at different times cashiers, salesmen, etc., in addition to the director, who are involved. They have signed the vouchers evidencing such withdrawals. None of the persons has been examined or has deposed to the effect that these transactions are sham. Even if the present employees of the assessee-company may be expected not to give evidence against the assessee, certainly all the past employees would not collude with it and support the transactions even if they are sham. There is nothing to show that these payments have any other non-business destination. The amounts being, thus, a clear outgoing for the company have to be deducted. The assessee's claim for all the years is to be allowed. 40. The position in the case of intervener Indochem Ltd. is the same. The claim for payment of commission has to be allowed in their c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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